Your Money: Figuring out how tax burden has changed

Posted: January 09, 2013

Confused about the new tax act? So were we, so we checked in with some local money managers and accountants to sort it out.

Practically speaking, all working Americans' taxes will rise in 2013 because the payroll tax holiday of the last two years ended. In 2013, the payroll tax rate returns to its old level and employees will pay 6.2 percent in Social Security taxes rather than the lower 4.2 percent. This tax break saved a worker making $50,000 annually about $1,000 last year, according to Edward Kohlhepp of Kohlhepp Investment Advisors in Doylestown.

So beyond that, how much more or less will we owe in 2013?

Hat tip to the nonpartisan Tax Policy Center in Washington for this handy calculator: http://calculator2.taxpolicycenter.org/index.cfm. Using this, I got an estimate of what my taxes would be for 2013 versus 2012 based on being married filing jointly and calculated a quick number (It was higher. Loud boo!!).

There will be no new tax on municipal bonds, as was rumored, and that prompted a sigh of relief among investors in munis.

James Colby, portfolio manager with Market Vectors ETFs, took note of the New Year's rally in the equity markets and simultaneous sell-off in Treasuries by investors who had sought safety in bonds while awaiting the outcome of Congress' deliberations.

But what needs to happen "is a response from business that reflects both relief and confidence in the stimulus. Business may need to see how more revenues will be raised and what programs may be pushed over the cliff before employment increases and GDP can rise. With higher taxes coming for many Americans, I believe the tax-free coupon makes munis all the more desirable," said Colby, who helps oversee more than $2.1 billion in municipal bond exchange-traded funds, which includes the Market Vectors High-Yield Municipal Index ETF (symbol: HYD), Market Vectors Long Municipal Index ETF (MLN), and Short Municipal Bond Index (SMB).

Capital gains

The tax rate on long-term capital gains and qualified dividends for individuals above the top income tax bracket rises from 15 percent to 20 percent effective Jan. 1. It applies to those with incomes above $450,000 (joint) or $400,000 (single). The 15 percent rate is retained for taxpayers in the middle brackets while the zero rate is preserved for those in the 10 percent and 15 percent brackets.

See a handy table of the new tax rates at the website of accountants Marcum L.L.C.: http://bit.ly/Woo5eB.

Bearish on the market?

Recent equity market turbulence brought our attention to an actively managed "bear" or "short" fund, Ranger Equity Bear ETF (HDGE). It's not cheap to own, with a high expense ratio of 1.85 percent annually.

This bearish ETF debuted in early 2011, and has lost 25.97 percent since inception, but to put that in perspective, the broader market S&P 500 Index has risen 9.50 percent during that same period. This is an actively managed ETF where portfolio managers try to identify securities they believe have low earnings quality, aggressive accounting, or face news that may put negative pressure on share prices. All holdings in the fund are "short" positions - meaning the fund could benefit when share prices fall - and currently include: Chipotle Mexican Grill (CMG), Goodyear Tire & Rubber (GT), Cliffs Natural Resources (CLF), Fossil Inc. (FOSL), and Vale SA (VALE). The fund has attracted an impressive $145 million in net inflows this year, and assets under management total $225 million. This and similarly bearish ETFs will likely be popular if equity markets continue to peter out further into 2013. Investors looking to incorporate inverse, or "bearish," exposure into their portfolios without daily leverage, or investing using borrowed money, can take a look at HDGE.


Contact Erin Arvedlund at 646-797-0759 or erinarvedlund@yahoo.com. Previous columns are at philly.com/arvedlund.

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